As expected, the US Federal Reserve decided to leave the interest rate unchanged following a meeting that ended last Wednesday. The decision was unanimous; the rate on excess reserves of banks also did not change.
Thus, it can be assumed that the Fed sends a signal to the markets that it is making a hawkish turn - the phrase regarding the uncertainty of further prospects for the rate has disappeared from the text of the accompanying statement. However, the press conference of J. Powell did not add clarity, the head of the Fed technically avoided certain answers to direct questions, reducing his speech to the formula "we are considering the entire spectrum of data".
None of the FOMC members currently forecast a rate cut in 2020. Economic forecasts have not changed much and real GDP is still expected at 2.2% in 2019, 2.0% in 2020 and 1.9% in 2021. The forecast for the underlying PCE also did not change in 2020 and 2021, but was revised from 1.8% in 2019 to 1.6%.
Moreover, fixing rates at current levels means that the US economy will cease to receive additional support in the face of dangerously close to the recession. As a result, the Fed compensates for this step by other measures. In any case, Powell hinted that the Fed is ready to consider buying not only T-bills, but also other short-term coupon securities, if necessary.
Is there such a need? Judging by the forecasts, no since inflation, unemployment, GDP growth are at fairly confident levels. At the same time, the budget deficit in November grew to $ 209 billion. According to the Congressional Budget Committee, the deficit for the first 2 months of the fiscal year 2020 amounted to 342 billion, which is 11.7% more than a year earlier. The expenditure side of the budget is growing faster than the revenue side. The completion of the rate reduction cycle will increase the load, and the market expectedly responded to the results of the meeting with a decrease in the dollar exchange rate.
It is also necessary to proceed from the fact that not all market participants share the Fed's confidence regarding future rate changes; a number of banks believe that there will be another decrease in March. Now, what is completely clear is that the Fed will maintain liquidity at a high level. Thus, there is no intention to curtail the buyback program at 60 billion per month, so the dollar is likely to weaken in the medium term.
EUR/USD
The ZEW indicator, reflecting the economic prospects of Germany, rose markedly in December to 10.7p. The result was expected after the similar results were shown by Markit and Sentix.
The mood in the financial markets is improving, the euro has updated its local maximum on the eve of today's meeting of the ECB, and the forecasts are positive. At the same time, no surprises are expected from the first meeting led by Lagarde. Due to this, EUR/USD is likely to consolidate above the resistance zone of 1.1109 / 15 and the chances of a return to the range are low. In turn, testing the resistance 1.1178 is possible, but there are no serious prerequisites for steady growth, and so players will wait for the outcome of the vote in the UK.
GBP/USD
The UK manufacturing sector is declining for the seventh consecutive month. The decline was 1.2% in October, which is slightly better than expected. The trade balance has worsened significantly, partly due to a marked increase in the GBP rate against September lows, to a greater extent due to a decrease in output volumes due to lower capital investments due to a high uncertainty factor.
On the other hand, NIESR believes that the UK GDP growth in November will be zero, and as a whole, the 4th quarter will give an increase of only 0.1%.
The pound is trading at highs prior to the election, focusing on opinion polls. According to which, conservatives will get a majority in parliament and will be able to finally complete the Brexit saga. More so, the pound exchange rate largely reflects these expectations, so any signal that Johnson's victory is in jeopardy and that Labor will be able to create a coalition can bring down the pound to where it began its rapid growth a couple of months ago.
Nevertheless, a landslide victory for the conservatives could push the pound to 1.3270 / 80, however, there will be a high probability of correction against the background of profit taking, since the differences between the EU and the UK on trade relations after Brexit will come forward.
